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Banks' Derivatives Clients Expect Cost Increase

NEW YORK ( TheStreet) -- Companies believe new laws on derivatives will make it more expensive for them to protect themselves against price swings in commodities, currencies, or interest rates, as banks pass costs on to clients, according to a recent study.

Under the recent passed Dodd-Frank legislation, many derivatives trades that had been subject to little or no regulation will face new rules above all that they pass through a central clearing facility. Previously, trades in the roughly $600 trillion swaps markets were "bilateral," meaning the two parties involved in each trade were the only ones responsible for ensuring they would be paid back. A central clearing facility, with standard requirements for posting collateral, eliminates many of those risks.

Though the new rules are likely to impose new costs such as the posting of collateral, compliance, and technology, they are also intended to increase standardization of many derivatives contracts, which theoretically should reduce costs over the long term.

Consulting firm Greenwich Associates interviewed 40 so-called "end users"--companies in industries such as airlines and oil and gas that regularly use derivatives for hedging purposes. The study, which did not specify a time frame, found that two thirds of the participants believe rules requiring central clearing will increase their costs.

That implies companies expect banks such as Goldman Sachs (GS - Get Report), JPMorgan Chase (JPM - Get Report), Bank of America (BAC - Get Report), Citigroup (C - Get Report) and others that dominate derivatives markets from the dealer side will pass the costs along to their clients.

Goldman executives have publicly supported central clearing and have said they do not expect the Dodd-Frank legislation to affect the bank's profitability. Asked specifically about the impact of the derivatives rules on the bank's second quarter earnings call, JPMorgan chief Jamie Dimon told analysts it was too early to tell.

-- Written by Dan Freed in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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